UK Steel Market Evaluation Jan 2022

It is relatively easy to report on current and historical costs of the physical ingredients that drive steel prices but this All Steels bulletin steps over this boundary by making bold predictions on forwarding price direction.  These forecasts are all logically based on analytical trends, sentiment and anecdotal evidence collected from a wide base of trusted industrial contacts.

At the outset of this year, the impact of Omicron created massive uncertainty with such a high spread of infections.  However, whilst this has most certainly curtailed industrial consumption of steel during the early part of January, Omicron aftereffects now appear to be fizzling out, which should allow a steel business recovery.

It is still All Steels’ view that the rapid acceleration of steel prices during January -June 2021 were totally justified as steelmaking costs necessitated such price movement.  When we reflect on the data available however it is clear to see that a lot of the demand during this period was artificial with companies throughout the industry re-stocking from a very low base.  True underlying demand was therefore hidden and very much exaggerated by heavy inter-trade volumes within the stockholding and dockside trading community.  It was this activity that forced steel prices up a notch too far over the summer and by September steel traders and stockholders woke up to this reality, and demand on the mills rapidly diminished causing a price softening.  Much of Q4, 2021 was therefore a period of market correction as the industry tried to rebalance stocks to reflect true underlying demand and we believe it is fair to say that this correction process is still spilling over into Q1, 2022. 

It is also worthy of note that as part of this stock rebalancing process many mills did cut back capacity during Q4 and are still operating at reduced levels, so the supply and demand balance is not too out of kilter, and this is what has helped to avoid a boom-and-bust cycle like historical experiences.  As previously expressed, it is always the supply and demand balance that dictates prices, and therefore we saw rates softening in Q4, but the All Steels current view is that sentiment has largely improved.  Moreover, stocks will get into balance by the end of February 2022 and with the impact of Omicron expected to moderate many of the large infrastructure projects planned for the UK will finally take off. 

As All Steels, we have already seen evidence of steel buying to cover very large rail-related projects coming to fruition, but you can also see from construction media reports produced by the likes of Barbour ABI and Glenigan that the 2022/23 outlook for the construction industry is very strong.  Only this weekend news was released of electric vehicle battery start-up, Britishvolt securing £1.7 billion of funding to build a new factory in the North East that even makes an Amazon Warehouse look small all of which will consume a massive amount of steel to build the new factory.

The forecast for 2022 construction growth is circa 7% largely created by public sector investment.  It is also fair to say that construction was also constrained during 2021 by the general tight availability of building materials so many of last year’s construction projects will spill over into 2022.  Much of the supply flow should improve this year allowing the construction industry to flourish although optimism probably still needs to be tempered as labour availability is expected to remain tight.  Having said the latter industrial buildings in the construction sector which is one of the key focus areas for steel consumption is forecast to grow by a staggering 24% during 2022.

Whilst we are confident that steel buying activity will be strong in the months ahead off the back of the improved sentiment and more imbalanced stock levels many of the steelmaking cost drivers appear to be creating a necessity for mills to increase prices further.  It would therefore appear that we could be on course for another re-run of 2021.  The only variance this time is that a much higher steel price base should avoid excessive speculative buying, and this should logically result in a smoother rising of steel prices rather than the big leaps we experienced last year.

Hopefully, our opening message above gives a flavour of what we should expect but here are some of the updated data on steelmaking ingredients that force mill price changes which reinforce some of the positive sentiment messages already expressed.

Coking Coal
0.7 tonne used to make a tonne of steel
The recent movement in coking coal prices has remained under the radar but the new up spin must start to feature in the coming weeks' steel journals as prices are now at record-breaking levels.  It will be renewed buying activity that has probably been the catalyst for change as Chinese steelmakers return to the market to build up raw material inventories ready to increase production immediately after the Beijing Winter Olympics that concludes on 20 February 2022.

It is also understood that supply disruption currently exists in some of the major metallurgical coal mines.  Trade flows are also being hampered by rail transfer constraints from mines to the ports.  One such example was caused by an explosion at a coal transfer station in the US at the Curtis Nay terminal in late December that is one of the main handlers of this commodity.

The graph below clearly shows the impact for BOS route steelmakers.  Whilst the graph below shows Chinese domestic price movement the more highly transacted Australian seaborne coking coal hit a historic record high of $445 per tonne FOB Australia on Friday after a $15 per tonne daily jump.

Iron Ore
1.7ttonne used to make a tonne of steel
As conveyed in the coking coal section the increased Chinese buying activity will also be the probable cause for the recent push up in iron ore prices and with restocking continuing over the coming weeks, we will probably see little change to the upward price pressure.  This is surprising news for many pundits that were speculating that iron ore would remain in the zone of $80-$100 per tonne although it is perhaps the heavy resumption of steel production planned in China that is likely to have caught the market by surprise.  Such planned growth in steel output obviously questions China’s commitment to environmental improvements.

tonne used to make a tonne of steel
Scrap rates in Turkey always provide one of the best barometers for assessing steel prices as the speed of change is always most reactive to sentiment so it provides excellent direction on future steel prices.  The graph below nicely depicts steel price movement through the pandemic industrial recovery, but it is the current month's price bounce that should be spotlighted.  The All Steels view is that this immediate curve would have shown a higher price trend if production output in Turkey had not been constrained by energy issues which are explained below, nevertheless, this upward movement must be one of the early signs of another strengthening in steel prices.

The cost of gas and electricity remains hot news around the world and whilst we thought the problem to be just a winter spike issue the fundamentals would now suggest that high energy costs are likely to remain firm well into 2023.  There are many reports in the public domain produced by energy brokers and leading utility suppliers to justify the high prices and the table below nicely summarises the factors, reasons and resolution timeframes concerning the UK. 

Further afield in Turkey both gas and electric shortages are so bad that virtually all producers are having to regularly cut output.  In the Izmir region for the week ahead, there are three full days of government-enforced steelmaking closures.

Shipping Prices
The shipping cost of bulk raw materials such as metallurgical coal /iron ore fell away sharply in Q4, but this was understandably a reaction to a lack of raw materials flowing into China during this period as government pressure dictated a cut in steelmaking capacity.  As reported early however Chinese high volume steel production looks set to come back on stream for the second half of Q1 and just like coking coal and iron ore prices must be set to rise.

Looking more locally on typical 2,000-3,000t shipload quantities that service the UK there is no relaxation in shipping prices.  In our last UK steel market evaluation, we reported that we had seen shipping costs from Turkey increase by $70 per tonne during the period April 2021 to September 2021.  We can now confirm that the shipping costs on our December inbound material from Turkey increased by another $30 per tonne to $150 per tonne.  What is even more disconcerting is that our main Turkish hollow section supplier is now indicating that the forward price for Q2 could be as high as $190 per tonne.

EU suppliers on shorter shipments from Germany, Italy and Spain are also experiencing a similar surge in costs and on cargo we have just booked from Italy we have seen a shipping rate increase from September 2021 to January 2022 of Euro 60 per tonne.

At present we really can’t see any softening in shipping rates and when you consider that EU steel activity looks set to increase and marine diesel costs simply follow oil prices that are still trending upwards as shown in the graph even higher shipping costs look most likely. 

Port Congestion 
All UK docks remain congested and the peaks and troughs in trade flows are now creating total mayhem as all importers try to de-risk by advance bonding material for longer periods at the ports in preparation for the onset of each new quarter.  This is also being compounded by imports increasing to reflect demand growth and volumes to substitute the loss of domestic supply (left by large voids due to cuts in capacity to the market by the Liberty Steel Group particularly on engineering bar supplies).

The overload in the material at the ports is now commonly resulting in material being block stowed to maximise floor space capacity but the negatively of this action results in severe delays for material to become unscrambled for despatch after customs clearance.  In some cases, delays of 4-6 weeks are being experienced.  Moreover, due to such huge loadings on the ports, many have increased storage charges over the last six months from a low of 25p per tonne per week up to new highs of £2 per tonne per week.

The good news here is that transport availability constraints seem to have eased but we must recognise that this is against a background of lower trade activity in Q4 as the supply chain attempted to reduce stocks.  As we progress through Q1 and into Q2 buying activity and real underlying demand are all forecast to increase so tight transport problems are very likely to materialise once again.  Even with lower activity, the cost of transport has remained expensive and with fuel prices yet again rising we should probably expect more increases in transport costs especially given that diesel prices continue to move up.

Inflation (Finance)
High inflation levels have already resulted in one recent bank base rate increase and whilst this movement was small the movement is more impacting in today’s world of steel with material costs being so high.  More bank rate increases will inevitably be seen in 2022 and whilst this will add greater cost to the financing of steel inventories it will create wage pressure, adding even more costs to steel prices in an industry that is still heavily labour intensive.

EU Carbon Permits
Since our September report, the cost of Carbon Permits has advanced by another €21 per tonne to a new record high of €85.80 per tonne.  Such a rise impacts utility costs as referenced above but the bearing on steel prices through environmental taxes is more direct.

All steel producers are on a path aiming for net-zero carbon emissions but for many, this will take decades to be realised.  In the short term on capacity exceeding carbon allocations blast furnace operators must buy 2t of CO2 for each tonne of steel produced whereas electric arc manufacturers depending on the efficiency of their plant must buy 0.5-0.8t of CO2 for each tonne of steel manufactured.  As can be seen from the graph below these costs were insignificant 12 months ago but the impact today is very significant and with the cost of carbon permits continuing to rise this will just become an even bigger cost for those plants that fail to reduce carbon emissions.

In blast furnace production the carbon tariff escalation cost adds €171.60 per tonne to steel manufacturing costs (£143.60p per tonne).  In EAF manufacture the cost is somewhere between €42.90p - €68.64p per tonne.

UK Safeguard Duties
Safeguard duties seem to be impacting more of our inbound supplies and the cost of such duties are now becoming more punishing as it is a percentage charge on what are ever-increasing steel prices.  We are also finding that HMRC’s administration of quota monitoring and reporting is becoming so bad that traders are losing visibility as to when quotas become exhausted and by what level thresholds have been exceeded.

New rules on category 12 (effectively merchant bar/engineering bar) have tried to split out these products into two separate categories through chemical composition rules but material intended as general structural steel supply is regularly falling into the engineering bar classification due to high residuals such as copper.  Consequently, customs clearance is in total disarray.

On truckloads, this confusion has caused serious delays on customs clearances all of which adds to transport demurrage costs.  The big issue here however is that as a mass importer of steel, as of today (23-1-22), we have no idea of our duty liability on material customs cleared on 1 January 22 and little clarity on what quota, if any, remains available in products that we are landing in the UK during the coming week. 

There are many other factors that we could report upon all of which are upwardly affecting steel prices but, in this report, we have simply tried to focus on just the main steel price influencers.  We could for example expand on energy and steel price inflation caused by the threat of war between Russia/Ukraine that would have an unbelievable impact, but this would be speculative whereas we are just choosing to report on actual known facts.

As a steel trader that takes large stock positions the fear of a price crash is our biggest risk/concern and the reason why we must analyse steel price influencers in such detail.  It is against this background that we have resumed buying heavily for our Q2 requirement despite the high prevailing steel prices.  We recommend that you take a pragmatic view on the data presented here, and make sure that you are reflecting anticipated replacement prices on the extremely valuable stock you hold for sale.